Will Labour’s Increase in the Minimum Wage lift Incomes?

The new government has taken no time extolling its desire for a higher minimum wage. $20 by 2020 is the number they’ve chosen, probably more for marketing purposes than anything evidence based.

In a world of casualised and contract work the minimum wage means less than it used to. For those who it does affect however, a minimum wage rise is not always a good thing. As we have previously discussed, small regular increases in the minimum wage can encourage employers to lift productivity, which is a good thing. But push too far or too fast, and minimum wage rises can cost jobs.

If the minimum wage rises faster than economic conditions allow there will be a market reaction – most probably accelerated automation and/or greater contracting in those areas where the minimum wage still is relevant. It would be naïve to think that a politician can wave a magic wand and determine wage rates without any consequence. Markets always react.

The impact is likely to be greatest for young people who are struggling to get into the job market and once they get some experience wouldn’t stay on the minimum wage for long. Meanwhile those hard working parents who really need the extra money will only get about half of it anyway once Working for Families reductions are taken into account.

Internationally speaking New Zealand’s minimum wage is already very high (it is the highest in the OECD relative to the average wage). This implies that it would be reckless to extrapolate the experience of such countries who have found that rises in their minimum wage have not had significant detrimental effects on employment. Nobody is suggesting we can ramp up the minimum wage to what we like and have no employment effect.

This doesn’t for one moment take away from the fact that in New Zealand many are struggling. But it does suggest that the problem there isn’t wage rates, it is the cost of living. Our accommodation costs in particular are far above those in similar countries.

So what does Labour think it’s doing? Does it believe this is a way to boost the incomes of the lower paid in a world where globalisation and technological change is wiping out some jobs? Or does it believe that employers are exerting monopoly power over these workers and are boosting their profit margins through paying peanuts because they can?

Some businesses are certainly ripping Kiwis off, thanks to our out-dated competition law and their inordinate market power. However, as mentioned above it isn’t workers that are suffering compared with overseas, it is consumers. Logically this means the Government should take on big businesses to make life cheaper, rather than penalise all businesses by making labour more expensive.

We don’t know what Labour thinks about all this because they haven’t told us. More likely they have no idea themselves what the reality is but it sure serves the appeal to their traditional support to be seen to be “doing something” to improve the workers’ lot. In terms of having any overall positive impact on household incomes, Labour’s move on minimum wages is more than likely nonsense, but that can be irrelevant in the world of politics and headline grabbing.

What would TOP have done?

Firstly we would attend to the problems at the root cause. Many of the problems faced by our poorest members of society are because we have expensive housing and poor productivity. Closing the income tax loopholes (including those on owner occupied housing) will sort both those problems out. Wage incomes will be higher in the hand due to the tax rate cuts of our reform, and they will grow faster than they do now as the country invests in businesses rather than houses. We would also reform competition law to stop big businesses ripping consumers off.

Secondly our policy recognises 21st century realities. We acknowledge that globally inequality has shrunk massively since the onset of globalisation and economic liberalisation in hitherto fortress economies like China. We also can see the huge role that artificial intelligence and automation will be playing in destroying employment over coming years.

Our UBI policy is designed to address this. So far the response of the New Zealand government has been Working for Families. While that’s an explicit acknowledgement that the market value of many jobs is below the cost of living now in New Zealand, it does not address the growing issue. To deal to this reality we need a massive rise in productivity, which our tax reform is all about, and to ensure that labour is as mobile as we can make it in terms of responding to job opportunities. That is what the UBI is all about – removing the poverty traps that contaminate targeted welfare – and ensure people can respond to jobs at the market wage, because they already have an income base that enables them to afford to take on work.

We’re sure Labour’s underlying aims are commendable – to lift the incomes of those whose value in the marketplace is no longer sufficient for them to live on. We certainly endorse that objective. But there are two strands to doing that effectively and enduringly – a UBI instead of Working for Families, and the boost to productivity and lowering of tax on wages that closing the loophole in the income tax regime would finance. Dictating large leaps in the minimum wage is so bereft of any evidence of success, that one is left seeing Labour’s contribution in this area as rhetoric and nostalgia for old 1970’s-style wage-setting.

This is supposed to be a progressive Government. They need to be applying policies that are attuned to this century’s global reality, not last’s. Evidence-based policy please.

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David Attenborough: someone who believes in infinite growth is either a mad or an economist.

Several of the comments below would seem to agree with this viewpoint.

And it’s hard not too. It’s pretty clear that we have come to or are rapidly coming to the limit of grow of the type that places more and more demands on our constrained biosphere.

However, if we mean economic or financial growth, we have to include types of growth that are possible without further stress to the environment. There are all kinds of economic activity that do not put further stress on the environment.

Also, with appropriate policy measures, economic activity that does potentially degrade the environment can be forced eliminate that degradation, at which point infinite growth is then possible.

So, when you are saying infinite growth is or isn’t possible, it’s important to be clear about the type of economic activity.

What’s pretty clear is that infinite growth of the present type is impossible and if the present economic system can’t be modified accordingly, it will have to go.

Tim Norrie commented
2017-11-29 07:52:21 +1300

“Internationally speaking New Zealand’s minimum wage is already very high (it is the highest in the OECD relative to the average wage)”
This begs the question- which wage,where? NZ’s wages/Salaries are amongst the lowest in the OECD, to our shame. The notion that wages cannot rise because of the waged worker’s ‘low productivity’ is a deliberate lie,aided and abetted by employers and the previous National Government. It seems to me the country has plenty of money,despite the austerity imposed on us under the ludicrous economic settings we have….this notion that NZ Inc must not ever subsidise or support business or workers is not followed by our trading partners-China,Australia and most certainly not the Americans or the hapless British. Definitely a progressive wage increase for the lower paid workers will be beneficial to the economy at large ,as the proportion of income spent is greater than that of the better heeled and will up the GST take,amongst other benefits. Henry Ford got it right when he increased his workers wages-to allow them to buy his vehicles- but the nett flow on proved beneficial to the economy. The greatest threat to our Economic wellbeing is the opinion of Economists, and there are many ‘truisms’ about the veracity of their opinions.

steve pivac commented
2017-11-28 20:41:10 +1300

Thanks Oliver, and that’s without even considering the banking and financial system. There has been much shedding of political crocodile tears over the rise in house prices recently everywhere in the world recently. It has not been accompanied by the disturbing reality (especially in any mainstream media) that the financial system is absolutely dependent, on allowing people to take out more loans, at a continuing higher level, to create the money supply that allows last years loans to be paid back. There is little recognition that the banks create money from the debt that people enter into. The fractional reserve system then allows interest to be made on these monies, just created, by the banks, out of thin air….with only a fraction of the loans extended being represented (or being able to be paid back) by the banks assets. It is the ultimate con game, and similarly demands more and more out of a finite environment to keep going! We humans think we’re a clever bunch…but we are now at the stage that we need a serious rethink. Where are we going? Where do we need to be? How are we going to get there? Cheers

Oliver Krollmann commented
2017-11-28 18:52:04 +1300

Very good point, Steve, and one of the most ignored. Growth at all cost or growth for growth’s sake can’t work. I’m hoping for a big shift in thinking towards sustainability over the next few years, which is one of the very few paths that might have a chance of saving us. I’m not talking about going back to the stone ages or other stupid ideas – technology will play a big part in a sustainable future. It’s about doing better and getting better with diminishing and limited resources, and adding renewable resources to the way we live and work.

steve pivac commented
2017-11-28 18:12:14 +1300

These are all good points…there’s a critical one missing….a fundamental concept; as we get closer to the margins both environmentally and with regard to the EROEI on our energy sources our current economic system continues to demand constant growth to perform. It is very basic maths that if you add growth to constant growth you end up with an exponential curve. Clearly in our finite world we are approaching limits; environmentally, with regard to our energy use and socially. Constant (exponential) growth is quite simply an IMPOSSIBILITY in a finite environment. We have a finite environment, we are pretending we can just go on doing what we are doing.It cannot end well unless we accept that we need to redesign how we live, what and how much we consume, and where our waste products go.

Andrew Jones commented
2017-11-28 17:20:35 +1300

I think you are missing the point, the minimum wage is too low, lifting it will make a huge difference to many people’s lives.

Any employer who moans they can’t afford to pay the increase shouldn’t be in business, or are taking to much off the table for themselves. Shut up shop and go get a job, or work harder in your business – we have never paid anybody under $20 an hour and never would, it’s insulting.

We are fast becoming a miserable little country and as for tax loopholes, the price of milk/dairy and petrol etc in NZ ( these are seperate cartel issues that should have been dealt with years ago), why are they even mentioned in this article about the level of the minimum wage?.

Progressive OECD mumbo jumbo TOP

Andrew

Matt Walkington commented
2017-11-28 16:55:03 +1300

Here’s the thing. What kind of an economic system are we locked into where workers and fellow citizens are forced to choose between the following two options?

(a) Work for pay which is insufficient to live with any kind of dignity.

(b) Possibly work for somewhat better pay but risk losing your job.

There’s something fundamentally wrong with an economic system that presents this choice. It’s as if we were choosing between between being robbed at knife point or being robbed at gun point. The morality of a capitalist (mixed) economy that presents this choice has to be questioned at a fundamental level.

I think Gareth you need to also consider/discuss macro-economic and other measures that would create more demand in the economy, drive down unemployment and drive up pay. One of the biggest steps would be measures to further encourage labour organisations (unions and similar), to encourage job security (i.e. discourage job insecurity), and to reduce the effective length of the work week. (I note the new government has agreed to review and reform of the Reserve Bank Act – which could presumably include low unemployment as a target of monetary policy.)

Given the robots are definitely coming for jobs, a robot tax should to be part of the debate. So, should reduced hours for the same pay, so that workers actually benefit from automation. As you point out, UBI should be part of the debate too. Universal Basic Services is also a policy that can be part of the mix. (I note Helen Clark’s recent call for universal dental care.)

Also, it puzzles me the complete taboo around discussions of government deficit spending to stimulate demand in the economy. I mean, we’re supposedly over neoliberalism and austerity as any kind of solutions. What we hear from the new Labour-led government are the so-called “Budget Responsibility Rules”, which are as plainly neoliberal as it gets.